Jamaica
| Pages | 109-116 |
Page 109
Jamaica faces serious challenges to long-term growth and development imposed by a substantial debt overhang. Like many other Latin America and Caribbean countries, Jamaica emerged from the 1980s with a heavy external debt burden. The focus then had been the effective management of the external debt portfolio. The combination of external factors-such as low export earnings, reduced access to long-term loans on concessionary terms, and the internal developments of weak output performance and low revenue intake-saw the government relying on domestic financing. Consequently, by the 1990s, the high levels of external debt and attendant issues combined with the cost of rehabilitating the financial sector after the crisis in the financial sector in the mid-1990s resulted in high and rising levels of domestic debt, high interest rates, and fiscal deficits.1
Jamaica has taken steps to ensure that sound economic fundamentals are in place to address these issues. A major thrust of the government's economic program has been the reduction of the overall debt. Given that the high levels of public debt and debt service severely limit the government's ability to invest in physical and social infrastructure necessary to promote investment and growth, since the second half of the 1990s, the major challenge to the government of Jamaica has been the management of debt dynamics. Emphasis has been placed on management of the domestic debt, the larger and more expensive share of the public debt.
Jamaica accelerated its structural reform program in the early 1990s with, among other developments, the liberalization of the foreign exchange market, the removal of price controls, reduction in trade barriers, and the reform of the tax system. The containment of inflation and the maintenance of relative stability in the foreign exchange market became the focus of the macroeconomic stabilization program introduced in 1991. This was to be achieved through a combination of tight monetary and fiscal policies.
The government succeeded in reducing inflation to single-digit levels and maintaining relative stability in the foreign exchange market. However, one of the costs of the stabilization was the marked increase in the level of the domestic debt, beginning in fiscal year 1994/95. Page 110 In addition to deficit financing, the increase in the stock of domestic debt was incurred largely to provide assistance to the central bank, the Bank of Jamaica (BOJ), in its liquidity management objectives and cover the BOJ's losses. Increases were also due to the assumption of debt obligations of parastatal entities. The debt problem was exacerbated by the financial sector crisis, which emerged in 1996, and the cost to the government of rehabilitating and restructuring the sector. All outstanding contingent liabilities that resulted from the rehabilitation and restructuring of the sector (approximately 35 percent of GDP) were assumed by the government as of April 1, 2001.
Jamaica's public debt-GDP ratio amounted to 130 percent at the end of fiscal year 2001/02 compared with 110 percent at the end of fiscal year 1994/95. Domestic debt as a percentage of GDP increased from 32.6 percent at the end of fiscal year 1994/95 to 63.9 percent at the end of fiscal year 2000/01. With the government's assumption of the remaining liabilities associated with the rehabilitation and restructuring of the financial sector, the domestic debt increased to 87.5 percent on April 1, 2001. By the end of fiscal year 2001/02, domestic debt stood at 77.5 percent of GDP. Debt servicing accounted for 66.1 percent of budgetary expenditure for fiscal year 2001/02, with domestic debt-servicing costs accounting for 54.8 percent of budgeted expenditure.
Over the last 10 years, considerable progress has been made in reducing the level of external indebtedness and the attendant debt-service burden. Jamaica's external debt has been reduced from 109.3 percent of GDP at the end of fiscal year 1991/92 to 52.4 percent of GDP at the end of fiscal year 2001/02. Jamaica's external debt-service ratio (total debt service as a percentage of exports of goods and services) has fallen from 29.2 percent in fiscal year 1990/91 to 12.3 percent in fiscal year 2001/02. The steady decline in the external debt and the improvement in Jamaica's external debt indicators led to the World Bank's 1999 reclassification of Jamaica from a severely indebted to a moderately indebted country. This achievement crowns a series of advances that includes
- Jamaica's exit from commercial bank restructuring in 1990,
- its "graduation" from Paris Club bilateral rescheduling in the mid-1990s, and
- its reentry into the international capital markets in 1997, which was subsequently buoyed by credit ratings from Moody's Investors Service (Ba3) and Standard and Poor's (B) in 1998 and 1999, respectively. Standard and Poor's upgraded Jamaica's credit rating to B+ in May 2001.
Despite these positive developments, Jamaica continues to face a heavy debt burden, the result of the acceleration in the rate of domestic debt accumulation. Thus, although the composition of the debt has changed markedly over the decade, with the share of domestic debt increasing from 26 percent at the end of fiscal year 1990/91 to 60.7 percent at the end of fiscal year 2001/02, the overall debt burden remains onerous.
Cognizant of the importance of reducing the debt to sustainable levels, the authorities took the necessary steps to strengthen Jamaica's debt management capability and embarked on a path toward the implementation of debt reduction strategies and prudent debt management practices. In addition, steps were taken to facilitate the development of the domestic capital market.
The need for institutional building and improvements in the government's debt management capability was critical to the formulation and implementation of credible debt management strategy and policies. Since April 1998, there has been a centralization of the debt management functions in the debt management unit (DMU) of the ministry of finance and planning. Before that, the debt management functions were shared by the ministry and the central bank.
Responsibility for the core debt management functions-debt policy and strategy formulation and analyses, debt-raising activities, and the registrar and payment function for government securities and debt recording and monitoring-now fully resides within the DMU. The BOJ, in its agency capacity, is responsible for effecting external debt payments, conducting primary market issues, and issuing and Page 111 redeeming treasury bills. The accountant general department, a department of the ministry of finance and planning, has responsibility for treasury operations, including the servicing of the debt.
At the operational level, the centralization of the core debt management functions within a single unit in the ministry of finance and planning has led to considerable strengthening of debt strategy implementation. Several factors explain this, foremost of which are increased capacity in debt management expertise, greater clarity of debt management objectives, and...
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